Saturday, 31 January 2015

Syriza has won the Greek election, which is the result I hoped for. For some this heralds the death of
neoliberalism. To celebrate, George Monbiot - whose journalism consistently
tells me more than most other journalists - says that here in the UK we should no longer
vote tactically, but instead vote for what we want. What dangerous nonsense!

At least he is honest in what such an approach implies. Anyone who votes Green in any seat where
Labour has a chance to win, aside from maybe a few seats where the Greens have
a chance (more realisticallyone or two), is voting for a Conservative government.
They will be in small part responsible for what happens under that government.
(Not voting in a seat Labour has a chance to win is almost as bad.) This is
going to be a tight election, so it matters. [1]

Monbiot says “If Labour wins in May, it is likely to destroy
itself faster and more surely than if it loses, through the continued
implementation of austerity.” His normal high standards of journalism based on
solid research go out of the window. I have, along with the IFS and Resolution
Foundation and many others, repeatedly pointed out that there is a huge difference
between Labour and Conservative fiscal plans beyond 2015. It is quite possible
that we will see very little additional fiscal tightening under Labour, and a lot more
public investment.

But with Monbiot in this mood, all this means nothing. The
additional hardship that those that depend on the state will undoubtedly suffer
if Labour do not win: collateral damage for the eventual triumph of the left.
The disintegration of the NHS starved of funds: it will happen anyway - but the last Labour government raised taxes
to increase NHS spending! This is not a strategy based on any kind of analysis,
but wishful thinking because he finds it distasteful to vote tactically. (The
British people had a chance to change their electoral system, and they chose
not to.)

In looking at Labour, he sees only their departures from his
own vision, and ignores their virtues and the realities of gaining power in
today’s environment. He thinks Labour is currently silent on the evils of
austerity because they believe in its virtues, whereas in reality they have
been forced into this position by mediamacro’s obsession with the deficit. That is why they
do not publicise their very different fiscal plans, but good journalism should
see through that. Wouldn’t it be nice to have a prime minister who was prepared
to stand up to the Murdoch press - oh wait. Wouldn’t it be nice to have a prime
minister who said: “This country is too unequal. And we need to change
it." - oh wait again (see postscript).

To say that Monbiot’s analysis represents a profound misreading
of history seems trivially obvious, but not for left utopianism. Monbiot says
“Fearful voting shifts the whole polity to the right.” Where is the evidence
for that? Neoliberalism did not triumph because the left decided to compromise.
Yes Greece voted for Syriza, but only when half of its young people were stuck
in unemployment. Is that the future that he hopes for by abandoning tactical
voting?

Parts of the radical left has always suffered from this misty
eyed idealism, where through blurred vision everyone else looks the same. I
remember being told by otherwise very intelligent people on the left that there
was no real difference between George Bush and Al Gore. Monbiot described voting No in the Scottish referendum
as “an astonishing act of self-harm”: no matter that the SNP tried to deceive the electorate that they would at all
times be better off independent; a sorry claim given what has subsequently
happened to the oil price. No doubt some said in 2010 that a future Labour
government would be much the same as a Conservative government. Please, just look at the evidence.

So, to repeat, anyone voting Green (or failing to vote) in a
seat that Labour can win but the Greens cannot will in part be responsible for
the consequences of a future Conservative government.

Postscript (19/2/15): Here is a link to those seats where this might apply.

[1] An interesting question, from an academic point of view, is
whether this argument is symmetrical, applying to UKIP and the Conservatives.
Perhaps not in one sense. If Labour loses because of votes lost to the Greens,
the reaction within the party will simply be to look for a more telegenic
leader. If the Conservatives lose because of votes lost to UKIP, perhaps there
is a chance that the Conservative Party will merge with UKIP, and adopt leaving
the EU as policy.

Thursday, 29 January 2015

who plan to talk about the economy
over the next 100 days. Here is a very simple fact. [3] GDP per head (a much
better guide to average prosperity than GDP itself) grew at an average rate of less
than 1% in the four years from 2010 to 2014. [1] In the previous 13 years (1997
to 2010), growth averaged over 1.5%. So growth in GDP per head was more than
50% higher under Labour than under the Conservatives, even though the biggest
recession since the 1930s is included in the Labour period!

You have all read, and perhaps written, that the Conservatives
will focus on the economy, because they think that is their strong point.
Compared to their performance on other issues, maybe it is their strong point.
But relative to the previous administration, this simple fact suggests
otherwise.

George Osborne says: “Britain has had the fastest growing
major economy in the world in 2014.” However GDP per head in the UK in 2014
remains below 2007 levels, but it had exceeded those levels in the US and Japan
by 2013. The UK is not bottom of the league in these terms only because the
Eurozone’s performance has been so poor. That GDP per head growth under 1.9% in
2014 can be trumpeted as a great success when it is no more than average growth
between 1971 and 2010, and when we should be recovering from a huge recession,
and when there are signs that this growth may not be sustainable,
shows how diminished our expectations have
become.

In terms of a historical comparison between the record of this
government and the previous administration Labour has no case to answer,
because its performance is miles better. I am sure a supporter of the current
government would say at this point that they had to clear up the mess that
Labour created. But just think what such an excuse implies:

(1)The
Great Recession was in 2009, so it is included in the Labour government’s
growth average, not that of the current government. You can see the impact of
the recession on the average (the red line) in the chart below. [2] Are they
really saying that the mess Labour left was worse than the impact of the global
financial crisis!?

(2)This
excuse implies that bringing the government deficit down rapidly (austerity)
meant that GDP growth is bound to be lower. This is something that the
government’s critics have long argued, and which the OBR agrees with [4], but
the government has always denied. Are they now admitting that austerity was
(really) bad for growth?

(3)If
a government was elected just after a major recession, you would normally
expect the exact opposite from these figures to be true. The new government
would benefit from the recovery from the recession, while their predecessors
average would be weighed down by the recession itself. So in any normal world,
you would expect GDP per head to have grown much more rapidly over the last
four years than any long run average. The fact that it has grown by
considerably less means that the government should have a lot of explaining to
do.

Growth under Labour, including the Great Recession, was 50%
better than under the Coalition. So please, if you want to make your reporting
on the economy over the next 100 days objective, use this fact. If the
Conservatives win this election because enough people believe that they are
more competent than the previous government at handling the economy, it will be
a devastating verdict - on the UK media and its journalists.

[1] The ONS data can easily be found here.
The fourth quarter data is not out yet, so I have taken the ONS data updated on
21st January, and assumed growth of 0.5% in the final quarter, which is the
first estimate of GDP growth in that quarter. That is obviously an
overestimate, as it assumes no population growth in that quarter.

[2] The chart uses quarter on previous year’s quarter growth
rates for the actual data (no estimates), and the average shown there is simply
the average of these growth rates.

[3] A tweet from Ann Pettifor
inspired this post, but of course responsibility for it is entirely mine.

[4] The OBR estimate, somewhat conservatively, that austerity
reduced GDP growth by 1% in both FY 2010-11 and 2011-12. That alone would raise
the average growth in GDP per head over the four years from 0.9% to 1.4%. Research
by Jorda and Taylor suggests
austerity had larger and more prolonged effects.

Wednesday, 28 January 2015

With Greece under Syriza about to enter negotiations with the
Troika, there has been much discussion of what might happen, and what should
happen. This post is in the ‘should’ category. In the past I have argued that the Troika should welcome the
opportunity to put right earlier mistakes. There should be a large amount of
guilt, or at least regret, on their side. I will say why in a minute, but just
to show that I’m not living in a dreamland, read this FT piece by Reza Moghadam, the former head of the
European Division of the IMF.

In reality debt restructuring is a bargaining game, but I want
to suggest a general principle that any agreement should hold to. That
principle is that there should be no significant increase in unemployment above
its natural rate (let’s call this excess unemployment) as a direct result of
having to pay interest on any government debt. Unemployment above the natural
rate when there is no excess core inflation is a waste of resources as well as
being damaging to most of those unemployed, so any deal that creates such
unemployment, or allows it to persist, should be regarded as the result of
creditors acting against the social good. Indeed you could easily argue that it
involves creditors acting against their own self-interest, because the more of
an economy’s resources you waste, the less is available to pay its debts.

This is why the Troika should feel guilty, because by not
allowing Greece to default on all its debt back in 2010 it helped create a
situation where over half young people in Greece are unemployed. Some excess
unemployment was inevitable in Greece after 2010 because the country had become
very uncompetitive, and the impact of this on demand had been offset by large
primary budget deficits. (This problem was made worse by pre-recession cost-cutting in Germany.) However, as I have argued in the past in the context of Latvia,
the efficient way to restore competitiveness is to have small but persistent
excess unemployment: a ‘short sharp shock’ is much more costly. The Troika
imposed much too much austerity on Greece in a futile effort to avoid full and
early default.

The process transferred the ownership of the remaining
Greek government debt from the private sector to the public sector - other
Eurozone governments and the IMF. The transfer to other European governments
was wrong in two respects. First, it was another example of governments bailing
out their own banks and other financial institutions with no costs to those
institutions. Second, it made any subsequent restructuring of Greek debt much
more difficult politically. If there had been full and immediate default there
would have still been need for additional lending to Greece to give them time
to adjust their public finances and avoid a large increase in unemployment, but
that is what the IMF is for. If the Troika had not been involved, the IMF may
well have gone for early and complete default.

So much for the past and guilt. What about what should happen
now. The priority is for Greece to reduce unemployment as quickly as possible.
That would be consistent with my principle, and so should be a priority for
both sides. It could be achieved, for example, by suspending all interest
payments on all Greek debt immediately, with those payments resuming on any
debt not written off once excess unemployment had been eliminated. Paul Krugman
shows
what a positive effect no longer having to run a primary surplus to pay
interest could have on the Greek economy. (As Paul Krugman observes in a separate post, and OECD data
confirm, the competitive position of Greece is now back to the level it was
when the Euro was created.)

What about all the ‘structural reform’ that the Troika has
imposed. The new Greek government is likely to introduce plenty of structural
reform of its own, so encouragement from outside is hardly necessary. If it is
not the structural reform that the Troika prefers, then I’m afraid that is the
price you pay for having a democratic Europe. We know that some within the Eurozone bureaucracy
have little respect for national sovereignty, and it is time these people were
put in their place.

What about the backlash from voters in Northern Europe? I find arguments that say this should be (we are
talking about what should happen here) a barrier to debt restructuring hard to
take seriously. Northern Europe’s politicians foolishly socialised the Greek
debt held by their own country’s financial institutions. To say Greece has to
pay the price of this mistake seems perverse. What about other periphery
countries wanting to revise the terms they were required to accept for Troika
help? Well maybe they are right to do so. And finally what about the argument
that this would ‘frighten the markets’ (always a good tell
by the side that uses it that their argument is weak)? The markets will be unsettled
far more if negotiations break down because creditors refuse to give enough.

Germany is now the third most popular country of origin for
pageviews of my blog, which is something I’m very happy about. I’m sure at
least some of those readers will be worrying that any renegotiation violates
‘the law’, or at least contracts that have been previously agreed. I have very
little sympathy with that argument. The British government was also protecting
the rule of law when it provided armed guards to ensure that shipments
of grain left Ireland during the famine of the 1840s.

Even if you do not accept my argument about the role that
creditors played in inflicting great harm on the Greek economy and people in
the past, these creditors have a clear choice for the future. Current levels of
unemployment in Greece represent a criminal waste of resources and source of
unhappiness, and it should be brought to an end as soon as possible. Creditors
can make this happen with a small economic cost to themselves by at least
suspending all interest payments until the Greek economy has recovered. It is a
cost that creditors are almost certainly going to have to pay at some point
anyway. As Martin Wolf says in an excellent column, “What cannot be
paid will not be paid.” It would be much better for the Greek people and Europe
as a whole for the Troika to admit this now rather than later.

Tuesday, 27 January 2015

If you are familiar with this blog, you will know that I regard
2010 as a fateful year for the advanced economies in their recovery from
recession. That was the year that the US, UK and Eurozone switched from fiscal
stimulus to fiscal contraction. Because we were at the Zero Lower Bound (ZLB),
this policy switch is directly responsible for the weak recovery in all three
countries/zones. A huge amount of resources have been needlessly wasted as a
result, and much misery prolonged.

This post is not about justifying that statement, but taking at
as given and asking what should we conclude as a result. [1] To answer that
question, what happened in Greece (in 2010, not two days ago) may be critical.
To see why, let me paint a relatively optimistic picture of the recent past.

Greece had to default because previous governments had been
profligate and had hidden that fact from everyone, including the Greek people.
Recessions rather than booms tend to be when things like that get exposed. If
Greece had been a country with its own exchange rate, then it would have been a
footnote in global macroeconomic history: fiscal stimulus that had begun in all
three countries/zones in 2009 would have continued (or at least not been
reversed), and the recovery would have been robust.

Instead Greece was part of the Eurozone, a monetary union that
had been implemented in such a way that it was particularly vulnerable to the
threat of default by one of its members. Policy makers in other union countries
prevaricated, partly to protect their own banks, partly because they worried
about contagion. The ECB refused to act as a lender of last resort - we only
got OMT in 2012. So the Greek crisis became a Eurozone periphery crisis. (For more detail, based on an IMF evaluation of their role in this affair, see this post.) This
led to panic not just in the Eurozone but in all the advanced economies.
Stimulus turned to austerity. By the time some in organisations like the IMF began to realise that this shift to austerity had been a mistake, it
was too late. The recovery had been anemic.

Why is that an optimistic account? Because it is basically a
story of bad luck, which we have no reason to believe will be repeated again.
When the next crisis comes along, the Eurozone will have OMT in place, and
hopefully there will be some rational system for deciding when a Eurozone
country that gets into difficulties should get ECB help or should be allowed to
default. If this was just bad luck, we do not need to rethink how macro policy
is made.

Now for the pessimistic version. The political right in all
three countries/zones was always set against fiscal stimulus. It is true that
during 2009, when no one was sure how bad things might get, Germany enacted a
modest (if fairly ineffective [2]) stimulus, but in the US and UK the political right opposed it. Without
Greece, we still would have had a Conservative led government taking power in
the UK in 2010, and we still would have had Republicans blocking stimulus moves
and then forcing fiscal austerity. The right’s strength in the media, together
with the ‘commonsense’ idea that governments like individuals need to tighten
their belts in bad times, would mean that opposition to austerity within the
political elite would be lukewarm, and so austerity was bound to prevail. While
we might hope that this right wing opportunism does not happen again during a
future crisis, there is no clear reason to believe it will not. Greece may have
just voted against austerity, but there is every chance that in the UK the
Conservatives will retain power this year on an austerity platform and the
Republicans are just the presidency away from complete control in the US.

If the pessimistic account is right, then it has important
implications for macroeconomics. Although it may be true that fiscal stimulus
is capable of assisting monetary policy when interest rates are at the ZLB, the
political economy of the situation will mean it may well not happen, and that
instead we get the fiscal instrument moving in the wrong direction. That means
that macroeconomists have to start thinking about how to fundamentally change
the way policy is done at the ZLB.

When some economists over the last few years began to push the
idea of helicopter money, I was initially rather sceptical. The scepticism
could be summed up by saying that helicopter money when you have inflation
targets is identical to tax cuts plus Quantitative Easing (QE), so why not just
argue for an expansionary fiscal policy? (There was also the point that tax
cuts might be a rather poor form of stimulus compared to, for example, bringing
forward public investment.)

However, if the pessimistic account is correct, then arguing
with politicians for better fiscal policy is quite likely to be a waste of
time, a lost cause. A more robust response is to argue for institutional
changes so that politicians find it much more difficult to embark on austerity
at the ZLB, or to allow others to effectively offset this austerity if it
happens. Central banks have QE, but helicopter money would be a much more
effective instrument. To put it another way, central bank independence was all
about taking macroeconomic stabilisation away from politicians, because
politicians were not very good at it. The last five years have demonstrated how
bad at it they can be. However that move to independence was always incomplete
because of the ZLB problem. We now need to make it complete.

This of course raises all kinds of questions. Do we want to
give additional powers to the central bank, or should another independent
institution be involved? If we do give central banks more power, could this be
limited to enforcing a dialogue between central banks and government (along the
lines suggested here), or should we go for something like
helicopter money? If the latter, what are the knock on consequences to ensure
the central bank can always tighten policy as necessary? Going down that road
must in my view include thinking about how to make central banks a lot more accountable,
so that they do not behave like the ECB. Arguably macroeconomics has been naive
in suggesting that the more independent a central bank is the better.

However, we only need to go there if the pessimistic
interpretation of the last five years is correct. Should we put the last five
years down to bad luck, or to political economy forces that will not go away. I
currently think the pessimistic interpretation is more persuasive, but I will
be very happy to change my mind.

[1] Many argue that the recovery was weak because the recession
was caused by a financial crisis, and it was always going to take a long time
before banks would start to want to lend again. Even if you put a lot of weight
on this argument, it implies a multiplier of one, not zero. It does not justify
reducing public spending and employment i.e. making people unemployed when
there was little chance they would find work in the private sector.

[2] The stimulus focused on tax cuts, which are less effective than increased government spending because some of the tax cuts will be saved. See Carare, A, Mody, A and F Ohnsorge (2009) “The German fiscal stimulus
package in perspective” VoxEU 23/01/09.

Sunday, 25 January 2015

This is about UK
politics, but it involves a wider point that applies in all countries where
austerity policies are being justified by the need for immediate deficit
reduction

John Rentoul, chief political commentator for The Independent
on Sunday, liked my Prospect debate with Oliver Kamm. To quote:

“I found it usefully clarifying. I started off on Kamm’s side,
because I worry about running a huge deficit in case interest rates return to
normal. But Wren-Lewis makes a convincing case for worrying about that later,
although he threw away some of his advantage at the end by suggesting George
Osborne has an ulterior motive for cutting public spending, namely the ideology
of a smaller state. Who wants the state to be larger than it need be?”

There is an awful lot I could talk about in that paragraph, but
let me focus on the ulterior motive point. [1] First the bit of my argument
that Rentoul is referring to.

“Why is this government proposing to repeat past mistakes, and
embark on a policy that makes so little sense in terms of the macroeconomics
taught to students around the world? As an academic I have tried and failed to
find a macroeconomic logic to what the government is proposing. Could it be
that in reality the deficit is a smokescreen to hide the underlying goal, which
is a smaller state? The British people do not want a smaller state, so the only
way it can be achieved is by maintaining the myth that reducing the deficit is
our top priority. The government can only get away with this myth as long as
enough of the media, with the help of City economists, support it.”

Let me be honest here. I did think twice before writing this,
because I knew it might evoke a negative reaction among some who read it. Why
not, as Rentoul suggests, just stick to the ‘no macroeconomic rationale’ point?

Before directly addressing this, let me draw an analogy. Here is a piece by Jeffrey Sachs in the FT
about climate change which on this occasion I’m happy to agree with. He
does not waste time with a point by point refutation of everything that climate
change sceptics put forward. Here is his conclusion:

“At the end of the day, we have a classic story of political
economy. There is a very concentrated but very weighty interest group with an
interest in finding and pumping oil, and then there is the rest of humanity,
with an interest in a rapid transition to a low-carbon future. The interest
group owns Congress and much of the airwaves; it moves election results in
Australia and Canada, two other carbon economies; it drives politics in the
Middle East and Russia. Politics is often a close call. This one – for the
survival of the planet – is going down to the wire, with a crucial rendezvous
in Paris at the end of the year.”

Now you might equally say on this occasion why taint a
perfectly good scientific case about climate change with conspiracy theories
about oil interests? There are two excellent reasons. First, the trouble with
debating the 'scientific' arguments of this interest group at face value is that it gives
the impression that there is genuine debate going on, and that the key facts
about climate change are controversial in scientific terms. That is nonsense,
but it is also exactly the impression that this interest group wants to create.
Most people will not go through the science and realise that the sceptics case
is virtually non-existent. Instead they will think the science is controversial,
and so go with their instinct, or with whatever those who support their
politics advocate. This is why the US has an unusually low number of people who think
climate change is a major threat. Second, I think social scientists have a duty
to explain the world as they see it, and not hide these truths away because it
might be too much for some.

Of course climate change and austerity debates are not
completely comparable for many reasons. However when it comes to the
macroeconomics of Osborne’s policy, I think we have now reached a similar
point. Back in 2010, there was an arguable case for rapid deficit reduction,
particularly as the source of the Eurozone crisis was unclear. In 2014 we know
a lot more. Let me justify that with three arguments.

First, the paragraph I wrote is quite truthful in describing my
own thought process. I have searched hard to find a macroeconomic rationale for
Osborne’s policy stance. A belief that QE is as effective as conventional
monetary policy (there is no liquidity trap) comes close, but as I explained here it does not really fit with what Osborne
has said (or not said). Osborne is certainly no market monetarist, as he has
shown no interest in nominal GDP targeting. So there does not appear to be a
coherent case for Osborne’s fiscal proposals that a macroeconomist could take
seriously.

Second, the idea that the real motive is a small state is not
the preserve of some small group of left wing conspiracy theorists. Here I quote Jeremy Warner, economics editor
of the Telegraph (for non-UK readers, a newspaper firmly to the right): “In the
end, you are either a big-state person, or a small-state person, and what
big-state people hate about austerity is that its primary purpose is to shrink
the size of government spending.” He also wrote: “The bottom line is that you
can only really make serious inroads into the size of the state during an
economic crisis. This may be pro-cyclical, but there is never any appetite for
it in the good times; it can only be done in the bad.” I also think many of my
non-UK readers will wonder why I am having to justify what is obvious in their
countries.

Third, it must have become clear to many people now that
reducing the deficit cannot be the overriding priority when there have been so
many tax giveaways (50p rate, Help to Buy which creates large contingent
liabilities, Cameron’s conference commitments, stamp duty changes that are far
from fiscally neutral, pensioner bonds). Putting these down to ‘politics’, but
counting spending cuts as ‘economics’, will not wash. (See Brad DeLong for the equivalent in the US).
You cannot pretend that deficit reduction is driving government policy, when
that driver only operates on the spending side of the accounts.

Economists in the media are beginning
to realise this. It is really important that political commentators do so as
well, so that those without an economics background get a clearer idea of the
nature of the choices they will have to make in 100 days time.

[1] Who wants the state to be larger than it need be? I
couldn’t agree more, but then each state activity should be examined on a case
by case basis. Osborne’s cuts are not based on analysis of that kind, because
it presupposes the result (there have to be cuts of a certain size).

Friday, 23 January 2015

I missed this paper by Philippe Martin and Thomas Philippon
when it came out last October, but thanks to Francesco Saraceno I have now read it. There
is also a VoxEU post by the authors. It is particularly
interesting for me because it undertakes analysis (using a model which is
itself interesting but which would make this post too long to discuss) of a couple
of alternative histories for the Eurozone which are related to two claims that I have made in the past:

1)It is nowwidely accepted among macroeconomists (but not politicians or the media) that fiscal profligacy was only the major cause of subsequent problems in Greece, while elsewhere private excess was the
main problem. I have argued that aggressive countercyclical
fiscal policy before 2008 would have reduced subsequent problems.

2)If the ECB’s OMT programme had been implemented in
2010, rather than September 2012, this would have substantially reduced the degree of austerity required
outside Greece. As a result, these countries would have had a better recovery
from the Great Recession. [2]

Put the two claims together and I would argue that the 2010-12
Eurozone crisis (rather than just a Greek crisis) need not have happened. OMT
would have limited fears of contagion, allowing a quicker and more complete Greek
default. There would have been no funding crisis outside Greece, and no need
for the core Eurozone economies to immediately embark on austerity.

How does the paper address these arguments? In terms of fiscal
policy, it imagines reaction functions for government spending and transfers
that contain a (common) countercyclical element, but also a (country specific)
positive drift term, in Greece, Ireland, Portugal and Spain. One counterfactual eliminates the drift. This does not exactly fit the scenario I had in mind, because I see actual policy as not being countercyclical but (Greece apart) having less drift. However the end result is the same: a counterfactual with much more fiscal tightening before the recession. An interesting result is that tighter fiscal policy could have substantially reduced the rise in
interest rates spreads in Ireland and Spain. The pre-2008 employment boom would
not have happened in Greece, and would have been substantially reduced in
Ireland, but the impact in Spain would have been smaller but non-negligible.

It conducts another counterfactual which imagines
macroprudential policies that eliminated the household leverage boom in each
country. This has a significant effect in reducing the boom in Ireland and
Spain. (There was no actual employment boom in Portugal.) By inference a
combination of countercyclical fiscal policy with no drift, plus
macroprudential policies, would have been ideal.

So claim (1) seems to hold up fairly well. Of particular
interest is what would have happened to employment from 2008 under a purely
countercyclical fiscal policy. In Spain it would have fallen as a result of the
recession, but subsequently stabilised rather than continuing to fall as it did
in reality. In Ireland employment would have fallen in the recession, but would
have risen again from 2010 rather than continuing to fall. This is partly
because countercyclical fiscal policy would have helped, but also because lower
levels of debt going into the recession would have reduced the increase in
interest rate spreads, easing monetary policy.

With a pure countercyclical fiscal policy the debt to GDP ratio
in Greece would have stayed flat (because there would have been no boom),
suggesting that the Greek crisis was essentially a result of fiscal profligacy.
In Spain the debt to GDP ratio would have fallen to nearly 20% of GDP, rather
than staying above 40% of GDP in reality. In Ireland public debt would have
been largely eliminated. This indicates the substantial amount of
countercyclical policy that was required to tackle what were very large
domestic booms. (Fiscal policy would presumably have been less contractionary if combined
with macroprudential controls.) It also tells us how foolish it was to have a
Stability and Growth Pact which essentially ignored the need for such
countercyclical fiscal policy.

Claim (2) is examined in its own counterfactual, which
essentially eliminates the increase in interest rate spreads that occurred from
2008. The beneficial effects on all four periphery countries are substantial.
This counterfactual is unrealistic for Greece, because OMT should never have
been implemented for Greece - immediate default was the better and more
sustainable option. However I think it is highly credible that, despite Greece,
if OMT had existed in 2010 spreads in other countries would have stayed low. [1]

Francesco Saraceno draws the lesson that the real problems with
the Eurozone are institutional, and I agree. The Stability and Growth Pact was
misconceived (as some of us argued before the Eurozone was created),
because it ignored the need for countercyclical fiscal policy. The ECB delayed
acting as a sovereign lender of last resort for two years, creating a Eurozone
crisis out of what should have been just a Greek problem. The conclusion I
draw, unlike many economists, is that the concept of a European Monetary Union
was not inherently doomed to fail. It was the way it was implemented that
caused the crisis.

It would be very nice if this was all about history.
Unfortunately exactly the same mistakes are continuing, with equally damaging
effects. Fiscal policy continues to be pro-cyclical, meaning that we had a
second Eurozone recession and no real recovery from that. Monetary policy is
either perverse (2011), or 6 years too late (!) and continues to openly encourage
fiscal austerity. That most policy makers in the Eurozone have still not understood past errors remains scandalous.

[1] The paper attributes this to the reduced risk of union break
up. I suspect it does so because it wants to make interesting comparisons
between Eurozone countries and US states. My own analysis has instead focused
on the danger of a self-fulfilling funding crisis when there is no lender of
last resort. That danger presumably exists for US states.

[2] An interesting question which I have not examined is whether, even if OMT had existed in 2010, it would still have been better for both Ireland and Spain to have written off some of their debt.

Thursday, 22 January 2015

Paul Johnson of the IFS has
written that under Labour “national debt [could be] around £170
billion higher (in today’s terms) by the end of the 2020s than would be
achieved through a balanced budget.” That was all that certain newspapers needed to start talking about a
borrowing bombshell under Labour.

£170 billion is a meaningless number, and the end of the 2020s
is a meaningless date. First, we should put everything as shares of GDP. £170
billion is about 10% of GDP, and debt is currently around 80% of GDP. However
it would be completely wrong to infer
that under Labour debt to GDP would be 90% of GDP by 2030. If they achieved
current balance by financial year 2017/18, then my excel spreadsheet says that
with nominal GDP growth of 4% a year, by 2030 debt to GDP would be around 65%
of GDP. (A few points below 65% if investment remained at 1.5% of GDP, a few points
above it became 2% of GDP.) If the Conservatives balanced the overall deficit
each year debt to GDP would be about 47% of GDP by 2030.

So a £170 billion bombshell actually means debt to GDP would
have been reduced from 80% of GDP to around 65% of GDP. So the correct headline
should have been “debt to GDP cut by a fifth in 2030 under Labour’s plans”.
That is debt, which is much more difficult to reduce than the deficit. To say
this is a ‘different interpretation’ is too polite – newspaper reports got it
completely wrong. Who should you blame for this: Paul Johnson, innumerate
journalists, biased newspapers? I’ll leave that to you.

There remains a real question of how quickly debt to GDP should
be reduced. In terms of the analysis I did here and here, Labour’s plans - if it did achieve
current balance by 2017/18 - are tougher than the path I described as ‘fast’
debt reduction, although not nearly as tough as Osborne’s plans. (This analysis
was done before the Autumn Statement, but to pretend that the analysis needs to
be revised on that account gives these numbers spurious precision.) However my
‘fast’ path did not keep to current balance after 2020, but had some further
deficit reduction over the next five years. (As a result, debt to GDP was below
60% by 2030 under this fast path.) I have not seen Labour commit to sticking to
current balance until the end of the 2020s. So in that sense as well the £170
billion number is meaningless.

What you should conclude from this is simple. First, as Paul
Johnson and many others have pointed out, both Labour and
Conservatives are aiming for tight fiscal policies (tighter than I and others think sensible given the macroeconomic situation), but the
Conservatives’ plans involve substantially more cuts than Labour. Both involve
reducing debt to GDP quite rapidly, so there is no question that both plans would not trouble
the markets. So the only reason for going for Osborne’s plan, now apparently involving budget surpluses, is if
you expect another financial crisis in the 2030s, and want debt to GDP to be
something like it was before the last one. [1] Or, as a headline writer might
put it (but somehow I doubt many would): “budget surpluses and austerity so we
can afford to bail out the banks again soon”.

[1] For those who are really into fiscal rules, there is a
technical question about whether it is better to have a target for the overall
deficit or the current balance. As George Osborne has moved from the latter to
the former, it may be best to read his detailed analysis of the issue. Cannot
find anything? Well maybe, as I note here, he is simply following the discussion in
Portes and Wren-Lewis (2014), which argues for
deficit targets but a separate target for the public investment to GDP ratio.

Wednesday, 21 January 2015

In a way this is a rather trivial post, about language and
attitudes as much as anything, that follows from some of the reaction to this post and related debates. One big difference
between most (not all) mainstream economists compared to their heterodox or
other social science colleagues is insularity. Political scientists will talk
to sociologists who in turn talk to international relations people as a matter
of routine. Economists by and large talk to each other. This is not because
their subject matter is narrow - economists are notorious for applying their
tools way beyond economics.

Most of the time I think that is fine, but sometimes it is not.
How do we deal with the times that are not? I want you - as either an economist
or social scientist or interested spectator - to think about a visit to your
doctor. Why? Because economists should really think of themselves like doctors.
(I know some want to think of themselves as physicists, but what can we do.)
They are trying to understand highly complex and erratic systems based on a
small number of principles, where most of the time they have very little idea
of what is going on. But they have data, and some of the time they can make a
lot of difference to people’s lives.

Now supposing your doctor prescribes you a course of treatment.
It involves drugs that you have read a little about, and you have some
concerns. If you were a social scientist would you say to your GP something
like the following:

“I’m a little worried about this. I feel that you may not have
adequately addressed the ontological and epistemological issues that are raised
here. What exactly is ‘treatment’, and when is it necessary? Have you thought
about the complex social and economic interrelationships that lay behind your
prescription? Is the nature of what you call ‘illness’ really independent of
the nexus of interactions that could be loosely called the medical profession?”

I kind of hope you wouldn’t, because I do not think you would
get very far if you did. You might be much better off asking something like the
following.

“I’m a little worried about this. Have you thought about
whether this treatment is appropriate to my particular circumstances (HT Ben Goldacre),
or are you reacting to pressure from the drug company or someone else? Has that
company published all its trial data, or only the
trials that were successful, and how was success defined in this case. Is this
really going to make me better, or just increase someone’s profits?”

It is a simple and obvious (I did say trivial) point - you will
get much further if you talk specifics in a language your doctor will
understand, rather than in generalities and terminology they will not.
Economists want (or need) to know why their approach is missing key issues or
linkages which compromise their analysis,
just as the doctor needs to know why they might be recommending the wrong
treatment. You would not insist that your doctor needed to have studied
economics before they can be a good doctor.

But if you were an economist, would you think it legitimate for
your GP to respond like this.

“How inappropriate of you to ask me these questions. I’m a
doctor, and I know from my years of knowledge and experience what is the right
treatment for you. As you cannot know what I know, then you should not get
involved in these issues. Some of the things you mention are really none of my
business, and I do not see why I should worry about them.”

Now as an economist you know that such a response from your
doctor would be both arrogant and naive. The doctor should ask about the
quality and objectivity of the information they receive, and know full well
that drug companies exist to make money. But might your response
to a social scientist be as arrogant and naive?

Let me take a real world economic problem: the response to the
financial crisis. Some have suggested that banks have become too large and need
to be broken up, or that the activities of high street banking need to be
separated from the activities of the casino. Your economic analysis tells you
that networks of many small entities can be as subject to crises as networks
involving a few large banks. You are also able to devise a system of Chinese
walls that mean that the activities of the casino can be separated from those
of the high street even within the same company, and your political masters
seem to prefer this approach. You recognise that different assets differ in
their liquidity, and so you devise complex weighting algorithms for computing
capital ratios. Your suggestions form the basis of negotiations between
officials and bankers, and a set of rules and regulations are agreed.

Over the next few years you watch in dismay as your complex
system begins to unravel. The CEOs of the large banks seem to constantly have
the ear of politicians, who in turn gradually compromise your elaborate
controls to render them less and less effective. Those in charge of
administering the rules find it much more lucrative to work for the banks, and
so regulators gradually lose expertise and resolve.

And you realise that right from the start you made the wrong
choice. You decided to focus on what you knew, which was how to design systems
that worked well as long as those systems remained unchanged, but which were
not robust to intervention by self-interested parties. In short, they were too
open to rent-seeking. You realise that actually the best thing to have done was
to break up the banks so that their political power was forever diminished. And
you recall a conversation with your social science colleague when this all
started, who might have been trying to tell you this if only you had understood
the words he was using.

Tuesday, 20 January 2015

This is a post about why
the taboo against helicopter money or money financed fiscal stimulus is
irrational once we have Quantitative Easing, but might nevertheless be in the
interest of some groups.

Many macroeconomists have argued that we shouldn’t think about
central banks in the same way as private banks. A central bank can never be
insolvent, at least as long as people use the currency it issues. It can cover
losses by creating more money. All that matters, from a macroeconomic point of
view, is whether it has the ability to do its job, which is to control
inflation.

I do not want to talk about controlling inflation here. Instead
I want to talk about these losses, and in particular who gains when these
losses are made. Macroeconomists tend to focus on the controlling inflation
point, so let me avoid that by imagining a really simple world. There is a
constant price level target, and base money velocity (nominal GDP/money) is constant in the long run, so base money must
return to some constant value in the long run to meet the target. In the short run velocity is not constant and we can have recessions due to demand deficiency in the usual way.

Think about Quantitative Easing (QE). [4] The central bank
creates money to buy government debt in the market at a time when that debt is
expensive, because it only does QE when interest rates are low. [1] Suppose it
just so happened that all this government debt that the central bank buys comes
from pension funds. These funds sell their debt, take the money and keep it as
money. After some time, the economy recovers, interest rates rise and the price
of this government debt falls. The central bank no longer needs the debt, and
it wants to reduce the money stock to get to the price level target, so it
sells the debt back to the market, or more specifically to the same pension
funds it bought it from. As the price of these assets has fallen, the central
bank makes a loss. The pension funds gets back the debt they originally sold, but they have some money left. They have gained.

Good for them you might say - why should I care? Well the central
bank is concerned that it has not got all its money back (it made a loss), and
to control inflation it needs to take more money out of the system. It asks the
government to recapitalise it, which the government does by raising taxes. What
has in effect happened is that money has passed from the taxpayer to the
pension fund.

My purpose in pointing this out is not to make some
distributional point. Instead it is to note that QE in this case involves the
central bank giving money away to pension funds. So why is this considered
kosher, but the central bank giving the same amount of money (its loss on QE)
directly to the public is considered deeply problematic? [2] Why would it be
thought completely wrong for the central bank to voluntarily give the same amount of money to the government so that
they could help stimulate the economy by some fiscal means (a money financed
fiscal stimulus)? [3]

If you think that my assumption about price level targets and
constant long run velocity was somehow critical here, imagine the case where to
meet its inflation target the money newly created in the long run (the loss on
QE) did not need to be taken out of the system. The pension
funds gain but no one seems to lose. But if the expansion of money had been via a
helicopter, then every citizen would gain instead. So why is acceptable to
create new money and give it to pension funds (through losses on QE), but not
create money to give to ordinary people or the government? The former is called
monetary policy and is OK for a central bank to do, but the latter is called
fiscal policy and this the central bank cannot do.

Why does this matter, apart from the distributional point?
Because as a means of stimulating the economy in the short run the effectiveness of QE is highly uncertain compared to the effectiveness
of direct transfers to citizens or public works. We seem to be stuck with an
ineffective form of stimulus, because something more effective is taboo, or
goes by a different name. To repeat it in a simple but more provocative way: a
central bank giving money to people or governments is out of the question, but
a central bank giving money to parts of the financial sector is just fine. That is a very convenient taboo for some.

[1] Suppose this is government debt issued many years ago, when
interest rates were 5%. So debt with a nominal value of £100 pays 5% interest.
If interest rates are now 2.5%, then this debt is more valuable than its
nominal value - indeed someone would pay you something near £200 for it if it
had a long maturity. However if interest rates go back to 5%, the value of the
debt would fall back to £100.

[2] Assume Ricardian Equivalence does not hold, so giving money
away now is expansionary even though that money has to eventually come back
when the central bank is recapitalised.

[3] If the money financed fiscal stimulus was in the form of
additional but temporary government spending, and when the central bank was
recapitalised the Treasury paid for this by temporarily reducing government
spending, we get what I call a ‘pure’ money financed spending
stimulus. I know of no theory which says that would not be expansionary.

[4] If you want to be topical, you could think about creating
money to buy foreign currency instead.

Sunday, 18 January 2015

The Chancellor gives a huge pre-election bribe
to the moderately wealthy over 65s, and describes the fact that everyone who
can is trying to get hold of the bribe (and completely overwhelming the NS&I
as a result) as a great success. [1] Chris Dillow describes this as corruption. To their credit,
right wing think tanks have also condemned it for what it is. But the
Chancellor says this is all part of his economic plan.

I suspect the penny is beginning to drop in mediamacro. This
was supposed to be a government where deficit reduction was the overriding
priority. It was of such importance that it was worth the risk (which
materialised) of delaying the recovery until 2013 to achieve. Hard, sometimes
painful choices had to be made to achieve the goal of reducing the deficit. A
Chancellor who was prepared to do unpopular things for the greater good. The
essence of responsibility.

Unless you were a top rate tax payer, of course. Or, following the
Prime Minister’s conference speech last year, a moderately well
off taxpayer. And now if you are moderately well off and over 65. Penny
dropped? But this last example also tells mediamacro a difficult truth. Its
modus operandi is that it can rely on the opposition to expose such things, but
Labour appears to have been silent on this.
Obviously, because these kind of bribes work because those that receive it are
thankful and the much larger number who pay for it are not so fussed. [2] So it
needs to seek out those who will call a spade a spade. It has a responsibility
to do so. This time it could use right wing think tanks. Next time it may have
to resort to economists who write blogs.

Chris Giles, economics editor of the FT, wrote an interesting opinion piece a few days ago. It appears at first
sight to be an attack on Labour’s record in opposition. But it ends with “the
intriguing thing about Mr Miliband’s Labour party is that its broad economic
prospectus for the 2015 general election is perfectly sensible.” In contrast
“the Tories’ plans appear ideological and border on calamitous for many public
services.” If you want more detail on this, see my debate with Oliver Kamm in Prospect magazine.
So his article is a form of puzzle: how did responsible Tories and reckless
Labour change places?

One possibility, of course, is that there never was a puzzle.
Chris lists many alleged failings by Labour, but a lot look superficial and
presentational to me. Furthermore (and I know Chris will not want to admit
this) when Ed Balls said Osborne was cutting too far too fast, he was right. In
particular, public investment (school repairs, flood prevention) was cut immediately when there was no need to do
so to meet the coalition's fiscal rules. Those who think it had to be done to
appease the market should reflect on the fact that Britain lost its AAA rating because of weak growth, and
pretty well everyone thinks that public investment has the largest GDP
multiplier.

It is the media’s responsibility, which Chris for his part has grudgingly fulfilled, to point out - one way or another - who has the more responsible
macroeconomic plan post 2015. The opposition will not make that case, because it
has become terrified of being labelled spendthrift. Yet it is hard to find a
macroeconomist who does not think Labour has the better macro policy from 2015,
whatever their views about 2010 austerity. A responsible media needs to get
this point across, just as it needs to point out pre-election bribes.

[1] Once upon a time NS&I was just a way that the government
could sell its debt to ordinary people at slightly below market rates because
it was safer than banks. However after the financial crisis, when it became
clear how risky banks were, the government seems to have contracted the range of products that NS&I
sell, I guess because of lobbying by these same banks. Once you could buy
indexed linked assets from NS&I - no longer. Now it has become a vehicle for
giving bribes to selected groups of savers.

[2] This is the ‘common pool problem’, one of the reasons
economists give to explain deficit bias, which is of course being irresponsible about
the deficit.

Saturday, 17 January 2015

A lot of the discussion in blogs about the end of the Swiss
exchange rate peg has focused on whether the original
peg, which started in September 2011, was a good idea in the first
place. [1] This post asks a rather different question, which has wider
relevance.

First some facts, which you can skip if you have already read
some of those posts. The safe haven status of the Swiss Franc meant that during
the Eurozone crisis people wanted to buy the Swiss currency, and the resulting
appreciation was in danger of driving some Swiss producers out of business. [2]
The chart below plots competitiveness, measured as relative consumer prices, in
Switzerland and in the UK. [4]

The appreciation problem in 2011 was real and the exchange rate
cap fixed that, but to prevent the exchange rate appreciating beyond the 1.2
Swiss Francs (CHF) per Euro mark the central bank had to create lots of money
to buy Euros. You can think of it as Quantitative Easing (QE) that buys foreign
currency rather than domestic government debt. [3]

The interesting question is why the central bank ended the cap.
Perhaps the cap was always meant to be a transitional measure, to allow firms
time to adjust to a loss in competitiveness. (Here is the official explanation.) This is not that convincing. If
the central bank was worried that its producers were becoming too competitive,
it could have changed the cap from, say, 1.2 CHF per Euro to 1.1 CHF per Euro.
Removing the cap completely would only make sense if you thought your safe
haven status had reached some kind of equilibrium, and with the Greek elections
and other things currently happening that seems unlikely. Even if you did think
this, caution might suggest testing the market with a more appropriate cap and
seeing how much defending you had to do.

As a result of ending the peg, the Swiss Franc has appreciated
substantially, from 1.2 CHF per Euro to around 1 CHF per Euro, even though the
central bank has lowered the interest rate on sight deposit account balances
that exceed a threshold to −0.75%. There seem to be two alternative
interpretations.

The first is that the central bank simply made a serious
mistake. For some, the mistake was to impose the cap in the first place. If you
do not take that view, and assuming the market’s immediate move is not a very
temporary overreaction, the large appreciation partly undoes the benefits of
the original peg. Either way, a major mistake has been made at some point. This
can be added to what is now a seriously long list of recent major central bank
mistakes: see in particular Sweden and the Eurozone. Does the fact that central
banks in the UK and US seem rather less error prone have something to do with
the greater influence of economists (inside and outside)
on those banks? [5]

The second interpretation is that the open ended money creation
that the policy implied just became too much for the central bank. In theory
the central bank could go on creating money and buying Euros forever. As long
as the exchange rate peg was reasonable this policy could be consistent with
its inflation target (the target is ‘below 2%’, while actual inflation is
currently negative). If it ever decided it was not and there was too much Swiss
money around, the policy could be reversed by selling Euros. The central bank might
make a loss when this was done, but economists generally dismiss this as a
non-problem (a central bank is not like a commercial bank), just as they
dismiss the same problem with conventional QE. But perhaps central banks do not
see things this way (HT MT), because they worry about
the political consequences of such losses. If this is the case, then this is
something that economists need to respond to in one way or another.

[1] The discussion in the media, as often with mediamacro, is
obsessed with the markets. The Guardian had a link entitled “Swiss franc - what
the economists say”. What you got were 6 City economists, who wrote the kind of
thing City economists write. Now I’m sure the Guardian will say they needed
something fast, and academics - even academic bloggers - are unreliable in that
respect. But please label this properly: you are getting the reactions of City
economists, whose primary concern is what this all means for the markets, and
not what it means for ordinary people.

[2] Economists have a theory, Uncovered Interest Parity (UIP), which
says that short term capital flows like this should not influence exchange
rates, because the market will keep rates close to fundamentals. It does not
work too well, partly I suspect because the market has little idea what the
fundamentals are, and partly because no one in the market is prepared to take
bets that last years rather than days.

[3] Switzerland has a really large current account surplus,
which since 1997 has averaged 10% of GDP. The reason for this surplus is complex, but it suggests that there is scope
for a gradual real exchange rate appreciation over time.

[4] Source: OECD Economic Outlook. The level is arbitrary, at
2010=100. A rise is an appreciation, which means a loss of competitiveness. The
average level of this measure of Swiss competitiveness was around 96.5 from
1998 to 2004.

[5] However the suggestion by Tony Yates that every blogger
should be given a job at the SNB seems to be going too far.

Friday, 16 January 2015

I suppose I should say something about this, even though I find it painful reading
his speeches. Not because they are so partisan - what would you expect? Perhaps
I can describe it by comparing it to an academic reading a student’s essay.
With something like Vince Cable’s speech last year, you can read whole
paragraphs quite happily, and then make a comment at the end like ‘yes, but you
have ignored this etc’. With Osborne’s speeches, you feel the need to get the
red pen out after every sentence. Each sentence seems as if it is crafted to
mislead.

Take, for example, the issue about whether high debt inhibits
growth. Now I happen to think that there are good theoretical reasons why high
debt might reduce growth. However my reading of the empirical evidence -
exhaustively examined following the critique of Reinhart and Rogoff - is that
while there may be some (rather weak) correlation between high debt and low
growth, there is no evidence of causality running from debt to growth, and more
evidence that causality goes the other way. This is what Osborne speech says:

“And the conclusion of the academic literature is that high
debt is undoubtedly correlated with lower growth. Even the possibility should
give us cause for concern given the huge impact that small growth differentials
can have over time.”

Does this give a rather different impression? But read it
carefully - does he say anything that is clearly wrong? As I say, it is
calculated to mislead, and the speech is full of this stuff. You may think that
just means he has very good speech writers, but this makes it hard for an
academic to read, and maybe an odd thing to do in an academic lecture. If the
invitation was given because the RES was hoping to get something more
substantial than the usual Osborne fare, I fear they will have been
disappointed.

Still, let’s put that aside and talk about fiscal rules. I have
argued that the form of Osborne’s original rule - achieve a particular deficit
target over a 5 year rolling horizon - is very sensible for normal times. Here
he proposes something that seems different - to start operating once the budget
has got to a surplus. He distinguishes between good times and bad times. In
good times the budget should be in surplus. In bad times, as called by the OBR,
the budget can go into deficit.

How to compare new and old? Could we reframe the new rule in
terms of the old, by simply replacing the target of current balance with a new
target of overall surplus? I’m honestly not sure - the speech is vague. What he
may be doing is thinking about bad times not as your typical economic downturn,
but something much worse, like the recent recession. In other words, he may be
thinking about the kind of exercise I did here. If he was, we can make the following
points:

1)To allow debt to GDP to go up substantially when there
are occasional large negative shocks (which are not followed by large positive
shocks), it makes sense to have debt to GDP falling in more normal times. I recommended
such an approach in 2009.

2)This can be done without going for a surplus in normal
times, just because of GDP growth. The exercise I did showed that. What is
optimal obviously depends on the size and frequency of shocks, and the extent
that fiscal policy is actively used to offset the shock. In my exercise, I
allowed for another Great Recession in 2040, and thereafter every 40 years. I
also allowed for much more fiscal stimulus than occurred under Obama. I assume
Osborne would not allow any fiscal stimulus. Despite this, I still had debt to
GDP trending downwards, with a target in normal times that was always a
deficit.

3)One interesting and clear difference between his new
and old rules is the focus on the overall deficit rather than the current
balance. This is also something that Jonathan Portes and I recommended in our paper. It has to be combined with a separate
target for public investment as a share of GDP, and in his lecture Osborne said
that in the next Parliament capital investment will grow at least in line with
GDP.

4)His proposal appears to give rather more influence to
the OBR during these negative shocks. Jonathan and I also suggested an enhanced
role for the OBR. In our proposal large shocks would be identified by the
central bank suggesting interest rates might hit their zero lower bound, but we
also said the OBR should be involved in thinking how deficits might evolve after
the shock.

So there are some sensible ideas here, although the failure to
acknowledge the problem of liquidity traps remains. There also seems to be an
unnecessary obsession with surpluses, but I expect that is just a consequence
of his short term goal of shrinking the state.

OK, one last piece of Osborne speak from the speech with
relevance to my last post: